Intel has a history of antitrust and unfair competition lawsuits and litigation spanning almost two decades. Antitrust authorities investigated into Intel's behavior and their findings proved unfavorable. First in Japan and then in South Korea, regulators ruled that the firm had violated antitrust laws by giving steep rebates and discounts to computer-makers if they limited their use of AMD chips or did not buy them at all. But it was the European Commission in Brussels that really went after the Silicon Valley firm. In May 2009 it fined Intel €1.06 billion for having abused its dominance. (http://www.economist.com/blogs/newsbook/2010/07/intels_antitrust_cases)
What is Predatory pricing?
A company engages in predatory pricing when it sets the price of its goods very low in order to eliminate its competitors and prevent new companies from entering into the marketplace. (http://economics.about.com/library/glossary/bldef-predatorypricing.htm)
Commission's allegations against Intel
The commission claims that Intel has been involved in unfair practices mentioned below;
Conditional rebates
Intel went beyond normal price competition by giving rebates to OEMs on the condition that they bought all, or almost all, of their chips from Intel. It has also made payments to PC retailers on the condition of selling exclusively Intel based PCs.
Pay-for-delay and frustrating innovation
Intel made direct payments to PC manufacturers to delay or halt the launch of products using AMD's chips, and to limit their distribution once launched. This directly haunts product innovation and reduces consumer's choice.
Concealment
EU's decision contains evidence that Intel went to great lengths to conceal many of its anti-competitive actions. Many of the conditions mentioned above were not to be found in the official Intel contracts.
Why is the case against Intel tricky?
Proving a firm guilty of predatory pricing is difficult. If competitors stumble or fail, that may be due to their own inefficiency or poor quality products, and not solely because they were preyed upon. Establishing that a firm is pricing below its manufacturing costs is tricky in practice. Same is the case with Intel:
Offering rebates and discounts is common in many industries. The question is did Intel attach any conditions to such rebates? - None of the official Intel contracts have these conditions mentioned in them.
Technological Innovation has not slowed down
AMD has increased its market share slightly during this period
Prices for chips continue to fall
Though tricky, the commission has not failed from nailing Intel with proper evidences.
Evidences produced by the commission
The Commission, with the assistance of several National Competition Authorities, undertook several investigative measures relating to the relevant AMD allegations, including on-the-spot inspections at the Intel sites in UK, Germany, Italy and Spain, as well as at the locations of several Intel customers in France, Germany, Italy, Spain and the UK. Inspections were also conducted at the sites of several European PC retailers and of Intel. In addition, several written requests for information were addressed to a number of major OEMs.
Based on findings from above, the commission came up with the following evidences;
Market share and barriers to entry
Consistently from 1997 to 2007 (period covered by the Decision), Intel held very high market shares in excess of or around 70 %. There are significant barriers to entry and expansion present in the x86 CPU market like, the huge investments in R&D, intellectual property and necessary production facilities. Intel's strong brand value and their product differentiation also constitute a barrier to entry. All competitors to Intel, except AMD, have exited the market or are left with an insignificant share.
Threat from AMD
Intel's illegal actions were designed to preserve its market share at a time when their only significant competitor, AMD, was a growing threat to its market position. This threat was widely recognized by both OEMs and in Intel's own internal documents scrutinized by the Commission.
Conditional rebates
Intel awarded major OEMs rebates which were conditioned as below;
OEM
Time period
Condition of rebate
Dell
Dec 2002 - Dec 2005
Buy chips exclusively from Intel
HP
Nov 2002 - May 2005
Buy no less than 95% for its business desktop segment from Intel
NEC
Oct 2002 - Nov 2005
Buy no less than 80 % Intel chips for notebooks and desktop segments
Lenovo
2007
Buy Intel chips exclusively for its notebook segment
The commission also investigated Intel awarding payments to Media Saturn Holding, Europe's largest PC retailer, which was conditioned on MSH selling exclusively Intel-based PCs. These payments were also deemed by the commission as equivalent in their effect to the conditional rebates to OEMs.
Pay-for-delay
Intel awarded major OEMs payments which were conditioned on these OEMs postponing or cancelling the launch of AMD-based products and/or putting restrictions on the distribution of AMD-based products. This is the case for:
OEM
Time period
Condition of payment
Acer
Sep-2003
Postpone launch of an AMD-based notebook from Sep 2003 to Jan 2004
Lenovo
Jun-2006
Postpone launch of an AMD-based notebook from June 2006 to End of 2006
HP
Nov 2002 - May 2005
a. Sell AMD-based desktops only to SMEs, through direct distribution(Avoid distributors)
b. Postpone its first AMD-based business desktop launch in Europe by 6 months
As efficient competitor analysis
Apart from proving beyond doubt that the conditions of the case-law for finding an abuse are fulfilled, the commission conducted an 'As efficient competitor analysis'. The test establishes at what price a competitor which is 'as efficient' as Intel would have to offer chips in order to compensate an OEM for the loss of any Intel rebate. This is independent of the fact whether or not AMD was actually able to enter the market.
The following factors were considered for analysis:
Contestable share (the amount of a customer's purchase requirements that can realistically be switched to a new competitor in any given period)
Relevant time period
Average avoidable costs
The analysis concluded that, Intel's rebate scheme means that given the contestable share, in order to compensate an OEM for the loss of the Intel rebate, an 'as efficient competitor' has to offer its products below a viable measure of Intel's cost.
The Commission also recalls the case-law according to which "where one or more undertakings in a dominant position actually implement a practice whose aim is to remove a competitor, the fact that the result sought is not achieved is not enough to avoid the practice being characterized as an abuse of a dominant position within the meaning of Article 86 (now Article 82) of the Treaty".
Lack of justification
Intel attempted to justify its rebate schemes claiming that, they were used only for price competition and to achieve efficiencies. Moreover, Intel claimed that conditions attached to the rebates were indispensable to attain these efficiencies and their impact on competition was minor since AMD grew during the investigation period.
Conclusion
Initially, though it seemed tricky to prove Intel of predatory pricing, looking into the evidences produced by the commission, it is pretty evident that Intel indulged in unfair agreements with two levels of distribution chain (major retailer and major OEMs), with the sole intention of foreclosing their only significant rival AMD. Moreover, Intel in its own justification admits that conditions were attached to the rebates, the reasons mentioned being irrelevant. Summing up all these facts, it is quite easily established beyond doubt that Intel undertook predatory pricing and it is justified for Intel to be the "Sponsors of tomorrow".
